Legal Briefing

Crime, Fraud and licensing | 01 July 2010

The existence of a mandatory exclusion from public procurement on a permanent and Europe-wide basis presents a real threat to the Serious Fraud Office (SFO)’s new culture of self-reporting.

Richard Alderman, the current director of the SFO, has made it his mission in recent months to encourage companies to step forward and self-report any discovery of wrongdoing in their ranks. The potential reward for such a self-report is an increased likelihood of the matter being dealt with via civil settlement rather than a criminal prosecution and a reduced financial penalty.

When the SFO issued guidelines on self-reporting in 2009 and stated that it would use civil penalties ‘wherever possible’ instead of criminal sanction, it looked like there would be a welcome sea change in the approach to corporate corruption cases.1 The guidelines seemed to be offering a pragmatic and effective way of dealing with corporate crime.

R v Innospec Ltd [2010] has created a wave of concern among those companies already in the plea negotiation process and those considering whether to self-report to the SFO. The sentencing judge Thomas LJ stated strongly that it would be:

‘Inconsistent with basic principles of justice for the criminality of corporations to be glossed over by a civil as opposed to a criminal sanction.’

Further, Thomas LJ questioned the ability of the SFO to enforce criminal plea agreements in respect of such matters.

This causes a big problem for corporate Britain. The consequences of a criminal conviction can be severe, including an increased risk of being excluded from Export Credit Agency and World Bank or multilateral development bank funding, and a perpetual ban from bidding for EU government contracts.

The EU Public Procurement Directive (the Directive) states that any company convicted of corruption, money laundering, fraud or participation in a criminal organisation must be excluded from participating in public contracts.2 Given that purchases by government and other public bodies account for a significant percentage of the UK’s gross domestic product (GDP), an exclusion from being able to tender for such work could have a seriously detrimental effect on a company’s turnover.

Procurement Rules

The purpose of the Directive (and its implementing UK legislation) is to open up public procurement (that is the tendering process for supply contracts with public bodies (such as government departments, local authorities, police and fire authorities, and local government authorities)) to EU-wide competition.

Article 23 of the UK’s Public Contracts Regulations 2006 (the Regulations) (implementing Article 45 of the Directive) provides that an economic operator will be treated as ineligible to tender for public contract if the contracting authority has actual knowledge that it or its directors (or any other person with powers of representation, decision or control) has been convicted of specified criminal offences, including:

conspiracy relating to participation in a criminal organisation;

corruption;

bribery;

fraud;

money laundering; and/or

any other offence within the meaning of Article 45(1) of the Directive (ie the same offences as listed above) as defined within the national law of any other member state.

In addition, the Regulations provide that a contracting authority may be treated as ineligible or may decide not to select an economic operator on the grounds that the economic operator has, among other things:

been convicted of a criminal offence relating to the conduct of its business;

committed an act of grave misconduct in the course of its business or profession; and/or

been subjected to various bankruptcy and social security provisions.

The Regulations do not dictate the steps that a contracting authority must take to establish whether economic operators have been convicted of any of the relevant offences. The UK’s Office of Government Commerce (OGC) issued guidance on this point on 15 March 2010 (OGC Guidance), which states that as a minimum, a declaration should be sought from all economic operators applying to tender confirming that they have not been convicted of any of the offences set out in Article 23 of the Regulations.

Scope of the Exclusion

Neither the Directives nor the Regulations explicitly set out the scope of the application of the exclusion, meaning that until recently, it was unclear whether a parent or subsidiary of a convicted company would be excluded from tendering for a public contract.

This has been remedied to an extent by the OGC Guidance, which states:

‘The declaration [that the economic operator has not been convicted of any of the offences set out in Article 23] should be directed at the economic operator as a corporate entity and to all those who represent the economic operator. This could include the directors of a company, the partners of a firm and/or those in an equivalent position, or senior managers who have “powers of representation, decision or control”. The term “economic operator” here refers only to the contractor, supplier or services provider applying to tender for the specific contract in question – not any subsidiaries or sub-contractors who may be engaged by the economic operator to perform some of the work under the contract. The provisions of regulation 23 do not apply where it is the parent company of an economic operator that has been convicted of any offences referred to in regulation 23(1), unless that parent exercises direct control over the economic operator. Legal advice should be sought on this point where it is relevant to a specific procurement.’

The OGC Guidance may give some comfort to companies that have been convicted of one of the offences set out in Article 23. It means that the convicted company’s parent company, for example, could tender for the public contract and then sub-contract the work to the convicted company. It also confirms that a convicted company cannot set up a new subsidiary and use that company to tender. This clarification will no doubt be welcome in the current economic climate of uncertainty surrounding corporate convictions, though businesses may still face the other collateral consequences of a conviction, such as debarment from World Bank or multilateral development bank funding and difficulties in obtaining Export Credit Agency funding.

It should also be borne in mind that the Directives have been implemented into the national legislation of each member state and there are likely to be variations in how the exclusion is applied to the corporate groups in each jurisdiction.

Bribery Act 2010 and Failing to Prevent Bribery

The OGC Guidance does not take into account the Bribery Act 2010, which consolidates existing UK bribery and corruption laws, making it an offence to give or receive a bribe or to bribe foreign government officials. It outlaws commercial bribery and includes a new strict liability corporate offence of failing to prevent bribery. This far-reaching provision not only applies to UK companies, but extends to corporate bodies and partnerships incorporated or formed outside the UK that carry on business (or part of a business) in the UK.

What is currently unclear is whether the corporate offence of failing to prevent bribery will fall within the mandatory exclusions of Article 23. Failing to prevent bribery does not appear to have the requisite dishonest or improper intent associated with conspiracy, corruption and fraud offences, or the knowledge or suspicion required for money laundering offences. While it is a strict liability offence, the relevant conduct is more akin to negligence than corruption. That said, during debate on the Bribery Bill in the House of Commons on 3 March 2010, Claire Ward, the Parliamentary Under-Secretary of State for Justice, said:

‘We are giving active consideration to whether conviction for the new corporate offence of failure to prevent bribery – the clause 7 offence – would require mandatory exclusion under the directive. That is not a straightforward issue and there are a number of complex points that we need to consider.’

Ward did not indicate what those complex points were and no further guidance has yet been given on this point. The Regulations specifically refer to offences committed under the old corruption acts and offences of bribery. This will have to be amended to reflect the new law when it comes into force, so this may add some clarification in due course.

If it is decided that the failure to prevent a bribery offence does trigger the Article 23 exclusion, companies will find themselves subject to a much more onerous responsibility to ensure that adequate procedures to prevent such conduct are in place, not only in respect of their own business, but also in respect of any other business or individual doing work on their behalf. This could extend, for example, to companies within a joint venture, even where each company does not have control over the actions of the others. Claire Ward commented that:

‘It will depend on the particular circumstances of the case, but it may be that a bribe by a person performing services for one company in a joint venture is rightly regarded as being paid in connection with the business of any of the companies involved in that venture. Equally, it may be the case that, on the facts, the necessary connections are not present to establish liability under clause 7 if a bribe is paid in the context of a joint venture. Ultimately, it will be a matter for the courts to determine where liability stands.’

Money Laundering

With recent headlines, companies could be forgiven for believing that the procurement ban is triggered only by bribery and corruption. The uncertainty surrounding corporate prosecutions at the moment could lead businesses to hold back on self-reporting a discovery of such conduct in its ranks to the SFO. The problem with this approach is that where there is bribery and corruption, there is almost certainly money laundering. Even if the conduct is historic and the offending individuals are no longer employed by a company, as soon as its existing directors know or suspect that money in its coffers represents the proceeds of crime, the offence of money laundering could be made out.

For the existing directors to protect themselves from conviction for such an offence, they may need to make a report detailing their knowledge or suspicions to the Serious Organised Crime Agency (SOCA). Such a report would be shared by SOCA with the SFO, opening the company up to investigation. Even if the directors decide against making a report, their auditors may have already done so. If the company was then convicted of money laundering, it would be mandatorily debarred from tendering for EU public contracts.

Impact

The spectre of a perpetual procurement ban will be a serious concern for those companies that discover individuals within its ranks that have committed or are committing conspiracy, corruption, fraud or money laundering offences. This, coupled with the uncertainty created by the decision in Innospec, the enactment of the Bribery Act 2010 and the limited available guidance, means that companies will have to think long and hard before making a self-report to the SFO.

Even where a company does not carry out a great deal of work in Europe, that does not mean it will not wish to do so in the future. This fetter on a company’s ability to move forward and grow can be unfair, particularly when the company has made a clean breast of it by removing the offending individuals and implementing improved compliance policies and procedures. It is unclear why a civil settlement, that pains a company but does not break it, would be inappropriate in those circumstances.

Companies caught up in corruption need a resolution that satisfies three requirements:

it must not break the bank and send the company into liquidation;

ii) it must not stifle the company’s ability to do business in the future by resulting in a procurement ban or funding difficulties; and

it must have certainty that any agreement made with the prosecutor will be endorsed by the courts.

Without these key ingredients, the recipe for plea negotiations is bound to fail. The lack of certainty, in particular, could be a deal breaker. Companies need assurance that any agreed financial penalty will not be dramatically increased by the sentencing judge the moment it reaches court. Otherwise the benefit of trading full co-operation in return for an agreed and certain outcome becomes null and void. The great irony of Innospec, which stated that corporate corruption offences should be dealt with by criminal prosecution, is that it means civil recovery orders are now the only way forward if the three key requirements are to be met.

Our new coalition government and the SFO must find a solution to this conundrum. If the plea negotiation process is to survive, it is clear that the guidelines need an urgent re-write and the judges need to be brought on side. The current consequences of a criminal conviction are just too uncertain and far-reaching.

The one saving grace is the ‘adequate procedures’ defence in the Bribery Act 2010. If companies put efforts into ensuring that they have detailed, effective policies and procedures in place to prevent bribery, they may actually succeed. Where those controls prevent bribery, they may also succeed in preventing conspiracy and corruption offences. Preventing these three offences may protect a company from the money laundering offence. As in most things, when it comes to the prospect of a perpetual EU public procurement ban, prevention is better than cure.

Notes

‘Approach of the Serious Fraud Office to Dealing with Overseas Corruption’.

Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the co-ordination of procedures for the award of public works contracts, public supply contracts and public service contracts. See also Directive 2004/17/EC of the European Parliament and of the Council of 31 March 2004 co-ordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors.